Financial Accounting: Free Cash Flows

Free cash flows is the amount of cash available from operating activities after paying for capital asset expenditures and dividends. It is called “free” because it isn’t designated for any particular purpose and can be used if a good investment becomes available. Free Cash Flows is a measure of liquidity. The formula is net cash flows from operating activities minus cash payments for capital expenditures, minus cash dividends. Here is a condensed Statement of Cash Flows from a sample company. We’ll use the highlighted information to determine the free cash flows. Net cash flows from operating activities is $1,500. From that we subtract $800 for cash paid for capital expenditures, and $100 for cash paid for dividends, resulting in $900 of free cash flows.

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